The December 2015 deadline set eight years ago by the 10-member Association of Southeast Asian Nations (ASEAN) for setting up the AEC represents a momentous event, whereby the creation of the sixth largest global economy (according to the ASEAN Economic Community Chartbook 2014) becomes a step closer to reality.
However a fundamental piece of the puzzle remains missing in supporting intra-ASEAN trade and the substantial small and medium enterprise (SME) sector – that of strong, harmonised and efficient cross-border payment and settlement conduits.
The AEC represents a huge economic opportunity. According to BMI Research, gross domestic product (GDP) is expected to grow from US$2.4 trillion in 2013 to more than US$6.2 trillion by 2023. The region already represents 4.4% of world GDP, and growth is second only to China’s. An important component of this growth is the development of an intra-ASEAN market, which has grown exponentially over the past decade, bolstered by the reduction in trade tariffs.
The Asian Development Bank (ADB) reports that around 70% of intra-ASEAN trade now incurs a zero tariff rate, although this does not apply to services trade which has been harder to liberalise. The ASEAN intra-trade in goods is now a US$600bn market.
There is, of course, much still to be done from a political and economic co-operation perspective. The key challenge for the ASEAN community is finding a common path given the contrasting infrastructure, technology, social and legal DNA of the 10 countries that make-up the AEC – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The continued development of intra-ASEAN trade is a common goal that can only benefit the region and is attracting interest from both foreign investors and financial service providers; the latter seeking pockets of growth in global trade finance.
Unfortunately the capacity for intra-trade to grow is – and will continue to be – limited by the lack of integration of the various payment systems.
Including SMEs in the path towards growth and integration
The cost, foreign exchange (FX) risk and legal complexity of cross-border payments in the region result in most transactions being high-value rather than low-value in nature and largely originate from corporates. This is a problem in a region where 70-80% of industry is made up of SMEs. The share of exports for SMEs has been around 35%, compared with 56% for large businesses according to the 2013 ‘ASEAN-BAC Survey on Asean Competitiveness’. Nevertheless the demand for goods is booming, especially with the development of mobile commerce (m-commerce). The ASEAN region is increasingly a mobile-first society (although the speed of Internet connectivity varies, from an average connection speed of 11.7 megabits per second (Mbps) in Singapore to 1.9 Mbps in parts of Indonesia) with mobile phone penetration at over 50% and average connection speeds much faster according to the latest quarterly ‘Akami State of the Internet report’.
The infrastructure divide explains a number of of the payment challenges faced by businesses and the reliance on a cash economy in some countries. This has given rise to alternative payment methods to support the provision of m-commerce, such as cash-on-delivery (CoD). However, by 2020 close to a third of the region’s population will be in the age bracket of 20 to 39 and an expected 60m new consumers will gain mobile Internet access. This will greatly increase the use of m-commerce, as this generation embraces the concepts of a shared and connected economy.
The Asian Trade Centre, launched last year in Singapore, has already identified that “getting e-commerce right and developing appropriate structures for the movement of data and information, rules on trade in goods and services, as well as specific SME issues related to trade finance and payments are necessary elements for businesses and governments in the ASEAN region.” Any failure to achieve these targets would cripple competitiveness and stifle growth.
Payment integration through technology innovation
The AEC rests on four pillars: a single market and production base; a competitive economic region; equitable economic development; and integration with the global economy.
Although there is no payment integration component per se as part of these pillars, technology is bringing the region closer to enabling real freedom of flow of goods, capital and investments. The different national switches are at various stages of developing their infrastructures, although here again the level of maturity varies. Nevertheless, there is evidently a move towards the creation of both real-time gross settlement (RTGS) systems and domestic automated clearing houses (ACHs) across the region.
Singapore has now the Fast and Secure Transfers (FAST) immediate payment infrastructure and the national Network for Electronic Transfers (NETS) is now able to accept China UnionPay (CUP) cards. Malaysia and Thailand are exploring similar initiatives, which will not only support the development of e-commerce but also eventually support intra-regional trade.
Another key development would be the broader adoption of ISO 20022. The standard offers the flexibility in carrying critical information previously ill-defined or altogether absent from the payments value chain. With the ISO structures, organisations can supply and receive the information critical to automation. Financial institutions (FIs) can offer services to assist in the migration to such capabilities and offer enhanced reporting and capital management tools related to these improved information flows.
ISO 20022 shows great promise in maintaining a balance between a standard that is powerful and consistently used, yet flexible enough to adapt to the proliferation of new types of payment offerings that both banks and non-banks are creating.
The corporate-to-bank path has been the weak link in the past, as banks compete to deal with proprietary variations or obsolete versions of standards. A common standard, such as ISO 20022, enables improved straight-through processing (STP) in this arena. It facilitates the automation of information flows to and from the corporation, improving timeliness of information updates as well as reconciliation due to the available information carried in the extensible fields.
The use of ISO 20022 in the intra-bank space offers operational efficiencies. A common standard drives interoperability across platforms and systems. Remittance information can be exchanged more expeditiously, to associate the payments and information flows. In addition, investigations and issues can be resolved more quickly when needed. Overall, the common use of a standard such as ISO 20022 facilitates improved visibility and transparency to customers, while processing transactions. This also suggests the ISO 20022 standard could source new revenue opportunities when packaged properly.
Removing friction and enhancing the value of payment flows would lower the costs of transactions and open up intra-regional trade to smaller businesses, although FX practices still need to be simplified. Overall, with ISO 20022, banks and business customers can realise better information flows and gain greater control of their cash positions – enabling them to make more informed decisions across the business.
Finally, given the high mobile usage in the region, banks and regulators need to consider that smaller businesses will be looking for omni-channel support for payment initiation, billing, invoicing and reconciliation. Given the remoteness of some locations, a branch network is costly and slow to deploy, limiting the financial accessibility for both consumers and businesses. Deploying digital-based services will offer a competitive edge and promote greater financial inclusion.
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